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Debtor Awarded Damages for IRS Violation of Discharge Order

McAuliffe, (Bktcy Ct WV, 05/26/2022) 129 AFTR 2d ¶2022-687

A U.S. Bankruptcy Court in West Virginia awarded damages to a debtor because the IRS violated the discharge order when it attempted to collect tax debts that had been discharged in bankruptcy. The court rejected the IRS’s defense that it didn’t willfully violate the discharge order when its automated system sent collection notices to the debtor.

The court said a violation of the discharge order occurs when the creditor knows of the pending petition and intentionally attempts to collect despite it. According to the court, the IRS’s characterization of its actions as “inadvertent” was invalid because:

  • The IRS filed a claim for the tax debt in the debtor’s bankruptcy;
  • It failed for nearly 12 months to enter the discharge order into its systems; and
  • The debtor mailed discharge notices to the IRS multiple times.

IRS collection action not inadvertent. The court determined that while one notice could be “inadvertent,” the IRS should have abated the discharged taxes after the debtor contacted it multiple times regarding the discharge order (which it should have known about anyway since it had filed a claim in the debtor’s bankruptcy case).

However, the IRS disregarded the debtor’s discharge notices and continued direct attempts to collect the discharged tax debts. In fact, the IRS took no action on the discharge order until the debtor reopened the bankruptcy case and filed a complaint against the IRS. The IRS didn’t abate the discharged taxes until nearly a year after the debt was discharged.

Note. This situation led to the debtor being unable to enter into an installment agreement for post-petition taxes she owed because the IRS’s records showed the discharged taxes were still due and owing.

The court also rejected the IRS’s COVID-19 excuse, noting that the agency sent the debtor two collection letters before the most serious effects of the pandemic hit the U.S. in March 2020.

In addition, the court dismissed the IRS’s argument that the debtor didn’t send the discharge notices to the right address. However, the court refused to penalize the debtor for directing his response to a collection notice sent from the IRS’s Cincinnati office to that office, rather than one of the offices listed on the IRS’s proof of claim.

The court also determined that the debtor wasn’t entitled to legal fees because she was represented by her husband. However, she was entitled to a refund of the filing fee she paid to reopen her bankruptcy case, in addition to the damages awarded, because she shouldn’t have had to pay the filing fee in the first place, the court said.

 

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